Regulatory: As a matter OFAC

You are sitting at your desk when you are handed an envelope that just arrived in the mail. It bears the return address of the Department of Treasury’s Office of Foreign Assets Control (OFAC) and it contains an administrative subpoena seeking information and documents relating to a particular transaction in which your company participated. It asks you to make this discovery production to OFAC’s Office of Enforcement within 30 days.

You may have seen news stories about financial institutions and manufacturing companies facing extremely large civil penalties for violations of OFAC’s sanctions programs, but if you have not dealt with OFAC before, there are several important questions that you are probably asking yourself:

What is OFAC?

What should you do in response to the subpoena?

What are the potential consequences for your company as a result of an investigation?

What can you do to ensure compliance with OFAC’s regulations or to avoid an investigation in the first place?

This article answers these questions and offers a brief introduction to the subject of OFAC enforcement actions.

What is OFAC?

OFAC is a component of the Department of Treasury that administers and enforces economic sanctions imposed by the U.S. against various countries and individuals. OFAC supervises a host of sanctions programs, which fall into one of two basic categories:

Non-comprehensive programs that prohibit transactions with specifically named individuals and entities who are in certain countries (such as North Korea or the Ivory Coast) or who are engaged in terrorism, proliferation of weapons of mass destruction or international narcotics trafficking. These individuals and entities are included in a list maintained by OFAC that is formally known as the “Specially Designated Nationals and Blocked Persons” —usually referred to simply as the “SDN List.” The various sanctions programs are authorized by two principal federal statutes—typically either the Trading with the Enemy Act (TWEA) or the International Emergency Economic Powers Act (IEEPA).

All U.S. persons—meaning U.S. citizens and permanent residents—must comply with OFAC regulations. This is true regardless of where the U.S. person currently resides. OFAC sanctions programs also apply to all persons and businesses within the U.S., and the foreign branches of U.S. companies. The Cuba sanctions program also applies to foreign subsidiaries that are owned or controlled by U.S. companies (which can create a conflict of laws in some countries, including Canada, that prohibit adherence to the Cuba sanctions programs).

What types of transactions can give rise to a violation of an OFAC sanctions program?

OFAC sanctions programs have a broad reach. Most obviously (and with certain exceptions), a U.S. company cannot engage in financial transactions with, sell goods to, or provide services to anyone on the SDN List or to nationals of the countries that are the subjects of the comprehensive sanctions programs. But not all violations of the OFAC programs are quite so obvious.

The following facts, under certain circumstances and in the absence of a license or other permission, could give rise to a violation of OFAC sanctions programs:

A U.S. company acquires a European bank that has customers who are Cuban nationals and now is faced with providing banking services in violation of the Cuba sanctions

A U.S. parent company provides back-office services for its overseas subsidiaries, which may do business with entities or individuals on the SDN list

A financial institution makes a loan in support of an underlying sale of goods that are shipped on a vessel affiliated with an Iranian shipping company

Employees of a financial institution “strip” out accurate information in order to disguise transactions involving a Sudanese business

A food manufacturer sells its products to wholesalers knowing that the products will be sold to Iranian supermarkets

Also, to the extent that a U.S. company restructures its business or reporting lines in order to use a foreign subsidiary or non-U.S. personnel to engage in a transaction that otherwise would be prohibited by sanctions, the company may be liable for facilitation of a prohibited transaction. The sanctions programs are complicated and can be easily overlooked, even by well-intentioned businesses.